STANDARD COSTING SYSTEM REVIEW

Overview

Production costs or direct costs are represented by the standard costs of any business, whether it is in manufacturing, import/distribution, or services.

The standard costs could be shown in various forms, either in a basic manual format, or in a Microsoft excel format, or in an ERP [Enterprise resource planning] accounting system format. The latter two formats will show the culmination of all standard costs of goods sold in a given period [usually a month], via a profit and loss statement. They will also show the variances to the standard cost of goods sold. If for example, the total standard cost of goods sold is substantially less than the actual cost of goods sold every month, then the standard costs recorded are insufficient as they are not recovering the actual costs.

Consistent under recovery of costs can be a significant problem in business, as products are more likely to be undercosted and therefore underpriced.

What We Do

• Examine and scrutinize the budget. If the costs are understated and the actual production hours are exaggerated, the standard labour and overhead recovery hourly rates will not be high enough. This will cause the problem as illustrated in the above example.
• Review and fix the budget.
• Recalculate the hourly labour and overhead recovery rates.
• Check standard production times for all products to see how they compare to their actual production times.
• Explain in layman’s terms what all the problems are, and how they can be rectified.

Your Results

Boardroom Innovations will enable you to have correct knowledge on:

• Product profit margins.
• How to create a realistic budget.
• How to make sure your labour and overhead recovery rates make sense.
• The importance of using realistic production times when costing products.